Insurers are preparing for a bold discussion on working out global standards for insurance supervision that have the ability to change the industry and the insurance market in the U.S. once they are put in place.
The proposed global financial regulatory changes of the International Association of Insurance Supervisors (IAIS) go beyond the cooperation and coordination many insurers have sought. The IAIS is holding its annual conference in Washington next week, beginning Sunday, with the nonpublic portion held the first part of the week.
With the G-20’s bank-heavy Financial Stability Board (FSB) offering glimpses of possible future supervision, some in the industry fear that the push for bank-centric, onerous and costly regulations will disrupt the industry’s core processes, creating an uneven trade system and setting up an uncertain arena of players where some are identified by certain criteria as systemically important or globally active (G-SIIs).
State insurance regulation “will be graded” on compliance with new, global standards starting in 2014, said Robert Gordon, senior vice president, policy development & research, Property Casualty Insurers Association of America.
“We don’t want the U.S. to get outfoxed in these discussions so insurers don’t end up with global, bank-centric rules,” Gordon said.
The FSB asked for insurance industry input last week in a first-of-its kind hearing, where it was gathering information on enhanced capital resiliency, rapid resolution of insolvencies and enhanced supervision, highlighting areas of concern.
Some worry that the FSB, and thus the IAIS are focused on loss absorbency, which loosely translates to higher capital requirements for insurers.
Although state regulators and the industry have weighed in against global banking standards throughout the process and various efforts in Europe like the now-delayed Solvency II, it is not clear who speaks for the US abroad during the discussion of capital standards. The states don’t want them and the NAIC doesn’t have a legal mechanism for applying them, but with the Federal Office of Insurance’s (FIO) director now a key IAIS player, it is unclear how capital standards will be envisioned, developed and finally, imposed.
For example, the life insurance industry has favored an outcomes-based approach for capital standards, one that is non-prescriptive.
Brad Smith, chief international officer of the American Council of Life Insurers (ACLI), said that the important thing is to continue to build cooperation and communication between industry and global regulators as they develop the common framework and finalize the methodology criteria for the identification G-SIIs.
The future G-SIIs, if U.S. companies are identified, are expected to be life insurance heavyweights and AIG.
The internationally active insurance groups also have not been designated, but are expected to be both life and property and casualty insurers.
One spot where there is some agreement is in the EU-US dialogue, which fosters appreciation of the two regulator systems on either side of the Atlantic, which FIO Director Michael McRaith helped set into motion. Some say this is the pivotal transatlantic project with the most impact beginning in the near–term. There will be a hearing sponsored by Treasury/NAIC late next week on the draft paper.
The concept of equivalency is very important, and is very critical to the US trade relationship with Europe and the treatment of U.S. insurers abroad as well as foreign insurers in the U.S.